"Is a girao a sale of an apartment on a temporary basis, or an opportunity to use an apartment by paying all the rent up front? Is it an opportunity to buy an apartment at a below-market price or to lose the hope of owning it at the last minute?
“Girao” can be a specific term or a form of transaction specific to a certain legal system. In Georgia the term “apartment girao” is widely used, but from the legal point of view this expression is not quite correct - the subject of “girao” (pledge), which serves as a means of securing both monetary and non-monetary claims, can only be movable things or intangible property benefits of debtors or third parties. Securing a debt with real estate, such as an apartment, occurs through a mortgage.
Since 2018, as a result of changes in legislation, the Civil Code has established that immovable things cannot be used as a means of securing a claim arising from a loan/credit agreement to be granted/issued to physical persons, including individual entrepreneurs. The restriction does not apply if the agreement establishes that the immovable thing encumbered with a mortgage was transferred for use to the mortgagor for the purpose of use as residential premises.
In such a transaction, a person enters into a contract whereby he or she is given the right to live in the apartment until he or she pays its full value within the terms agreed upon with the other party.
What is the correct way to execute a girao? What obligations does the seller have? What are the obligations of the buyer?
There are several ways to execute a girao:
1. Loan and mortgage agreements with right of residence:
Under loan and mortgage with right of occupancy agreements, the parties enter into an agreement that covers the loan, the mortgage, and the use of the apartment. Consequently, the “girao” of an apartment establishes three key legal relationships:
● Loan agreement - The lender provides money to the borrower and the borrower undertakes to repay it. The terms and conditions of the lending and repayment of these funds are established, including repayment terms, interest rates, and other important details regarding the financial and legal aspects of the transaction.
● Mortgage Agreement - The repayment of the loan is secured by a mortgage, which involves encumbering the apartment in favor of the lender. This ensures that the lender has the right to have priority over other creditors in satisfying claims and is a guarantee of repayment of the money borrowed by the borrower.
Apartment Use Agreement - The lender, holding a mortgage on an apartment, in lieu of an interest in the loan, receives the right to use the apartment during the term of the mortgage.
The parties may conclude separate agreements or integrate the terms directly into one contract.
Thus, under loan and mortgage agreements with the right of residence, the lender (mortgagor) is obliged to transfer to the borrower (owner of residential real estate) the amount of money stipulated in the agreement, in return for which the borrower encumbers his residential real estate in favor of the lender and grants him the right of residence. At the end of the contract term, the borrower is obliged to return the amount of money received, and the lender is obliged to remove the encumbrance and vacate the apartment, thus returning full rights to the real estate to the borrower.
A mortgage agreement concluded to secure a claim arising from a loan agreement shall be notarized. When certifying a mortgage agreement, the notary shall explain to the parties to the agreement the legal consequences of their breach of obligations under the loan and mortgage agreements.
A mortgage becomes legally effective only after its registration with the National Agency of Public Registry. This registration is a mandatory procedure that guarantees that the rights to the mortgaged property are legally secured and recognized by the State. This ensures that the lender can exercise its rights under the mortgage in case the borrower defaults on its obligations to repay the loan.
2. Sale and purchase agreement with the right of redemption:
A purchase and sale agreement with right of redemption is another opportunity to settle the desired legal relationship. Under a purchase agreement with the right of redemption, the buyer transfers a set amount of money to the seller, while the seller retains the pre-emptive right to subsequently redeem the property within a period of time established by the parties. The buyer, in turn, registers the title to the purchased property with the corresponding encumbrance.
If at the end of the term the seller does not exercise its right of redemption, the buyer has the right to apply to the Public Registry to officially remove the obligation and fix the property in its full ownership. This allows the buyer to not only protect their investment, but also to ensure that the seller's financial obligations are honored and that the risks and management of the mortgaged property are effectively controlled and managed.
What encumbrances/transactions are recorded in the Public Registry at the conclusion and upon completion of the contract?
Loan agreements and utilization mortgages:
- Registration of the mortgage (at conclusion);
- Remission of the mortgage (upon termination);
Agreement of sale and purchase with the right of redemption:
- Registration of ownership right (at conclusion);
- Registration of encumbrance - right of redemption (at conclusion);
- Withdrawal of the right of redemption (at completion).
Is it obligatory for both parties to participate in the registration in the Public Registry?
For registration of the mortgage right, an application of one of the interested parties accompanied by the necessary documentation is sufficient. This documentation includes a duly executed contract, a document confirming the payment for services related to registration, a document confirming the identity of the applicant.
What risks does it carry?
In a girao, both parties to the transaction may incur losses:
- For the borrower, the main risk is the loss of property in case of failure to repay the borrowed funds. If the borrower fails to repay the debt, the lender, taking into account statutory and contractual regulations, has the right to sell the mortgaged property through auction. This puts the borrower in a vulnerable position as they may lose their home and potentially be left with a debt if the proceeds do not cover the full amount of the loan. If the apartment is sold for less than the amount owed, the borrower will be left owing the difference, if that is what is stipulated in the contract;
- When a property is mortgaged to secure a loan, the lender must pay attention to verifying its status - a check of the Public Registry is required to determine whether it is a primary or secondary mortgagor. If the lender is a secondary mortgagor, he should be aware that if the property is sold at auction, the new owner has the right to evict him from the apartment without any compensation;
- The value of the mortgaged property may fall for a number of reasons, including economic changes, reduced market demand or physical deterioration, reducing the lender's protection;
- Sometimes the terms of the pledge may not be sufficiently clear in the contract, which causes legal uncertainty and can lead to disputes;
- Problems with the management and maintenance of the pledged property can worsen its condition and consequently reduce its value.
Pre-transaction legal advice can help minimize potential risks for both parties.
“Girao” can be a specific term or a form of transaction specific to a certain legal system. In Georgia the term “apartment girao” is widely used, but from the legal point of view this expression is not quite correct - the subject of “girao” (pledge), which serves as a means of securing both monetary and non-monetary claims, can only be movable things or intangible property benefits of debtors or third parties. Securing a debt with real estate, such as an apartment, occurs through a mortgage.
Since 2018, as a result of changes in legislation, the Civil Code has established that immovable things cannot be used as a means of securing a claim arising from a loan/credit agreement to be granted/issued to physical persons, including individual entrepreneurs. The restriction does not apply if the agreement establishes that the immovable thing encumbered with a mortgage was transferred for use to the mortgagor for the purpose of use as residential premises.
In such a transaction, a person enters into a contract whereby he or she is given the right to live in the apartment until he or she pays its full value within the terms agreed upon with the other party.
What is the correct way to execute a girao? What obligations does the seller have? What are the obligations of the buyer?
There are several ways to execute a girao:
1. Loan and mortgage agreements with right of residence:
Under loan and mortgage with right of occupancy agreements, the parties enter into an agreement that covers the loan, the mortgage, and the use of the apartment. Consequently, the “girao” of an apartment establishes three key legal relationships:
● Loan agreement - The lender provides money to the borrower and the borrower undertakes to repay it. The terms and conditions of the lending and repayment of these funds are established, including repayment terms, interest rates, and other important details regarding the financial and legal aspects of the transaction.
● Mortgage Agreement - The repayment of the loan is secured by a mortgage, which involves encumbering the apartment in favor of the lender. This ensures that the lender has the right to have priority over other creditors in satisfying claims and is a guarantee of repayment of the money borrowed by the borrower.
Apartment Use Agreement - The lender, holding a mortgage on an apartment, in lieu of an interest in the loan, receives the right to use the apartment during the term of the mortgage.
The parties may conclude separate agreements or integrate the terms directly into one contract.
Thus, under loan and mortgage agreements with the right of residence, the lender (mortgagor) is obliged to transfer to the borrower (owner of residential real estate) the amount of money stipulated in the agreement, in return for which the borrower encumbers his residential real estate in favor of the lender and grants him the right of residence. At the end of the contract term, the borrower is obliged to return the amount of money received, and the lender is obliged to remove the encumbrance and vacate the apartment, thus returning full rights to the real estate to the borrower.
A mortgage agreement concluded to secure a claim arising from a loan agreement shall be notarized. When certifying a mortgage agreement, the notary shall explain to the parties to the agreement the legal consequences of their breach of obligations under the loan and mortgage agreements.
A mortgage becomes legally effective only after its registration with the National Agency of Public Registry. This registration is a mandatory procedure that guarantees that the rights to the mortgaged property are legally secured and recognized by the State. This ensures that the lender can exercise its rights under the mortgage in case the borrower defaults on its obligations to repay the loan.
2. Sale and purchase agreement with the right of redemption:
A purchase and sale agreement with right of redemption is another opportunity to settle the desired legal relationship. Under a purchase agreement with the right of redemption, the buyer transfers a set amount of money to the seller, while the seller retains the pre-emptive right to subsequently redeem the property within a period of time established by the parties. The buyer, in turn, registers the title to the purchased property with the corresponding encumbrance.
If at the end of the term the seller does not exercise its right of redemption, the buyer has the right to apply to the Public Registry to officially remove the obligation and fix the property in its full ownership. This allows the buyer to not only protect their investment, but also to ensure that the seller's financial obligations are honored and that the risks and management of the mortgaged property are effectively controlled and managed.
What encumbrances/transactions are recorded in the Public Registry at the conclusion and upon completion of the contract?
Loan agreements and utilization mortgages:
- Registration of the mortgage (at conclusion);
- Remission of the mortgage (upon termination);
Agreement of sale and purchase with the right of redemption:
- Registration of ownership right (at conclusion);
- Registration of encumbrance - right of redemption (at conclusion);
- Withdrawal of the right of redemption (at completion).
Is it obligatory for both parties to participate in the registration in the Public Registry?
For registration of the mortgage right, an application of one of the interested parties accompanied by the necessary documentation is sufficient. This documentation includes a duly executed contract, a document confirming the payment for services related to registration, a document confirming the identity of the applicant.
What risks does it carry?
In a girao, both parties to the transaction may incur losses:
- For the borrower, the main risk is the loss of property in case of failure to repay the borrowed funds. If the borrower fails to repay the debt, the lender, taking into account statutory and contractual regulations, has the right to sell the mortgaged property through auction. This puts the borrower in a vulnerable position as they may lose their home and potentially be left with a debt if the proceeds do not cover the full amount of the loan. If the apartment is sold for less than the amount owed, the borrower will be left owing the difference, if that is what is stipulated in the contract;
- When a property is mortgaged to secure a loan, the lender must pay attention to verifying its status - a check of the Public Registry is required to determine whether it is a primary or secondary mortgagor. If the lender is a secondary mortgagor, he should be aware that if the property is sold at auction, the new owner has the right to evict him from the apartment without any compensation;
- The value of the mortgaged property may fall for a number of reasons, including economic changes, reduced market demand or physical deterioration, reducing the lender's protection;
- Sometimes the terms of the pledge may not be sufficiently clear in the contract, which causes legal uncertainty and can lead to disputes;
- Problems with the management and maintenance of the pledged property can worsen its condition and consequently reduce its value.
Pre-transaction legal advice can help minimize potential risks for both parties.